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Tuesday, May 19, 2009

an undergrad econ degree

"A degree in economics," he [a recently graduated student] said, "doesn't really prepare you to understand the economy very well."

Thursday, May 7, 2009

Cap And Trade is a Costly Lunch

I've always been against carbon taxes, and I've only been slightly kinder to at least the theoretical idea of a (permit auctioned) US cap and trade system.

Generally speaking, I've been slightly kinder to cap and trade since it allows adjustments to made on 'quantities' of emissions as opposed to 'price.' A number of economists disagree that that is better, but to me it makes sense to control the quantity since that is the ultimate aim of such a policy. Then, if the policy is too costly or not costly enough, changes could be made in the emissions cap easily and gradually. If we instead controlled the price, we could set some price via a guesstimate as to the social efficiency gained, but it would be just that, a guesstimate with myriad assumptions. If we set the price too high (low), it would need to be continually graduated downward (upward) until it became socially and politically acceptable. Letting government control the price would only serve to increase inflation and economic uncertainties. By controlling quantity, price can be determined in the market (hopefully subject to only mild fluctuations). Beyond that, the psychological effect of cap and trade on the consumer, and the political feasibility of it, make it a better choice than a carbon tax.

But I've only been slighly kinder, having said that, since an auctioned cap and trade policy would still have some of the negative side effects of a gas tax (distributional issues, regional issues, regressivity potential, "feed" the beast problems, etc.).

Nevertheless, it is likely that we will see (perhaps this year) some form of cap and trade happen in the United States. It is also nice to see that the Congressional Budget Office is really looking hard at the costs and benefits of such a policy. But noteworthy in their analysis are the huge 'unknowns' - the variability in terms of the kinds of benefits and costs this would mean for the US.

If I were a legislator, I would vote against cap and trade by noting that the Reinvestment and Recovery Act signed by President Obama already provides billions of dollars to supporting alternative technologies to oil-based ones. Subsidizing a change in the infrastructure of the US (toward a green infrastructure) while simultaneously gradually increasing fuel efficiency standards, in my opinion, is the correct approach to the problem of climate change. Though, my only fault is that the spending, by necessity of the recession, means that little study or thought was made as to what types of green technologies and infrastructure we should support. I hope that will change in the future as the US recovers.

But I'd vote against cap and trade for a second reason. The reason would be that I would be a legislator for the State of Indiana. As the CBO document discusses, the midwest would likely be hit the hardest under cap and trade. Consider that we have relatively little public transportation (compared to say the East Coast), we have the largest density of oil-demanding industry (manufacturing, coal, etc), AND we have the double-whammy of being the region hit the hardest by the current recession. A cap and trade policy, depending on how potential government revenues would be distributed, would likely throw Indiana and its neighbor States into an economic tailspin - which could, potentially, injure the already suffering auto industry even more, which could, in turn, negatively reverberate across the nation.

Tuesday, May 5, 2009

What I'm reading

I've long believed that theories of nominal wage stickiness and price stickiness, while useful in part, really seemed to miss the big picture. Turns out that back in 1999, a piece was written by little known economist Truman Bewley that took a more "all encompassing" heterodox approach to asking why firms prefer layoffs to wage cuts in a recession. By surveying hundreds of actual business people (as opposed to just looking introspectively to the Ivory Tower for answers), and by understanding common sense psychology, he came up with the "Morale" theory of wage rigidity - which for my money, makes the most sense in reality as to why wages are sticky.

Morale theory basically states that firms hold nominal wages rigid in recessions primarily to avoid demoralizing workers and reducing their overall job satisfaction, thereby avoiding the long-run negative such demoralization and disruption to existing employees can have on a corporate culture.

It's something that I've been thinking about for a while and discussing in my macro class, but something I never knew was already researched. So I was excited to learn of Mr. Bewley's contribution, and sadly, don't understand why mainstream econ isn't incorporating his work more on the macro side (actually, I have a hunch why they haven't, as readers of my blog can probably guess my feeling). So, I was equally excited to find this paper, which statistically seems to validate Mr. Bewley's ideas.

Monday, May 4, 2009

Incentives Matter, Except for When They Don't

From Mankiw:

It seems Dr. Mankiw is all about supporting green taxes, and doing away with many post-Keynesian principles in support of market activity because as he says both directly and in his text book, "incentives matter." Well it seems his recent post, which peddles research suggesting that the decision to locate overseas causes increased domestic activity as well (as opposed to REPLACING this activity), seems to just throw the whole 'incentives' idea out with the bath water.

I work in location-based incentives. Let me tell you, costs matter. Relative costs across borders matter. They aren't the be all end all as many development businesspeople would have you believe, but they are important. I don't buy the whole idea that foregin operations is a compliment to domestic operations. I haven't read the paper yet (can I get a free copy?), but I bet there is a huge correlation vs. causation issue here. Just because a firm gets big and ships overseas, and this is (DUH) correlated with increased domestic operations as well, does NOT imply that the relative cost difference due to the foreign tax shelters is what is causing this increased domestic production. The whole concept is ludicrous and smacks of political pandering, not economics.

But beyond that issue, "welfare economics" is stupid...the entire field is a waste of time because it starts out with assumptions about welfare that pretty much every person based in reality knows is stupid - like the idea that you can't compare utilities across people (ie. fairness is not important to welfare since fairness cannot accurately be incorporated into utility). BAM... welfare econ is useless. You need to think outside the box whenever you mention the word "welfare" because economics is NOT where you go to find such answers.